Introduction

In the realm of digital currencies, Bitcoin (often abbreviated as BTC) stands as a pioneer and a symbol of the ongoing revolution in the world of finance. Created in 2009 by an anonymous entity known as Satoshi Nakamoto, Bitcoin represents a radical departure from traditional, government-issued currencies. It is a decentralized, peer-to-peer digital currency, underpinned by blockchain technology, which enables it to operate outside the purview of centralized authorities such as governments and banks. This groundbreaking approach to currency is not just a technical innovation; it is a response to the financial instability and lack of trust in traditional financial systems, highlighted by the subprime mortgage crisis of 2007-2008. Bitcoin has not only garnered widespread attention but has also sparked discussions about the future of money and the potential transformation of the global financial system, especially with the buzz around the SEC approving spot Bitcoin ETFs in January 2024.

How Bitcoin works

Bitcoin relies on blockchain technology, similar to other cryptocurrencies, which serves as a distributed ledger secured by encryption methods. The blockchain collects transaction information and enters it into a block. Once a block reaches capacity, the information undergoes a hashing algorithm, using SHA-256 in the case of Bitcoin. This transforms the information into a 256-bit hexadecimal number known as the hash, which is then integrated into the subsequent block header. The hash, along with other block information, is encrypted, creating a series of blocks that are chained together. Transactions are validated by miners, who include the hash of the previous block, encrypt the new block using SHA-256, and verify the transaction within the network. Successful verification results in the creation of a new block, rewarding the validating miner with newly generated Bitcoins.

Proof-of-Work

The Bitcoin network uses a process called proof-of-work (PoW) to validate transactions and secure the network. Miners compete to solve complex mathematical puzzles to validate and add new transactions to the blockchain. The first miner who successfully solves the puzzle gets the right to add the new block of transactions to the blockchain and thus gains the reward.

Bitcoin Halving

Bitcoin rewards are halved every 210,000 blocks, which occurs roughly every four years. The block reward was 50 new Bitcoins in 2009, which decreased over time due to the halving. The first halving occurred in November 2012, the second in July 2016, and the third in May 2020. The third halving brought the reward for each block discovery down to 6.25 bitcoins—the next halving is expected to occur sometime in April 2024 and bring the reward to 3.125 bitcoins. The last halving will occur in 2140, in which all of the Bitcoin supply will be in circulation and no more Bitcoins will be created. When that happens, miners will only be rewarded via transaction fees.

Bitcoin Use Cases

Bitcoin is a decentralized virtual currency, initially designed to act as money and a form of payment. This is unlike traditional financial systems in which governments yield full control, including the ability to print money at will.

Today, Bitcoin is also widely recognized as an investment opportunity, propelled by various factors. Some proponents liken Bitcoin to digital gold, drawing parallels from its fixed supply and reinforcing it as an investment asset. It also can be seen as a store of value that can potentially safeguard against inflation and economic uncertainties. With the widening adoption of blockchain, individuals, including those with conventional banking backgrounds, are increasingly acknowledging the potential of Bitcoin, expressing optimistic sentiments toward its prospects.

Number of Bitcoins

Bitcoin’s appeal as a currency lies in its fixed maximum supply, a feature that distinguishes it from traditional fiat currencies controlled by central governments with the authority to print more money at their discretion.

Table 1: Information on BTC supply (Coinmarketcap, 19 Feb 2024)

Risks of Bitcoin

Although the SEC has just approved several spot BTC ETFs, there is still a lack of uniform cryptocurrency regulations around the world, as governments are still exploring the cryptocurrency industry. Changes in regulations or the introduction of new laws can impact the legality and usage of Bitcoin. For example, after the news was announced, the Monetary Authority of Singapore released a statement that Bitcoin ETFs are not approved for retail investors in Singapore.

Bitcoin like most other cryptocurrencies, is known to be a highly speculative asset class. The value of Bitcoin can experience significant fluctuations over short periods, which can lead to substantial gains, but also substantial losses.

Moreover, Bitcoin transactions are irreversible; once a transaction is completed, it cannot be undone. This absence of chargebacks or refunds necessitates that users exercise caution and engage in transactions with parties they trust.

Coupled with this is the risk tied to the security of Bitcoin wallets. Unlike conventional banking or online accounts, Bitcoin wallets lack social recovery mechanisms. Consequently, if a user misplaces their private key or seed phrase—a unique and irreplaceable set of words issued during wallet creation—there is no recourse for regaining access to their wallet. As a result, the Bitcoins stored within are rendered inaccessible and are effectively lost.

Conclusion

Bitcoin has emerged as a transformative force in the financial landscape, challenging traditional notions of currency and sparking discussions about the future of money. With its decentralized nature and reliance on blockchain technology, Bitcoin has not only provided a novel approach to transactions but has also become a symbol of financial innovation. While recent milestones, such as SEC approval for spot Bitcoin ETFs, underscore its growing acceptance, it is crucial to recognize the associated risks, including regulatory uncertainties, price volatility, and the irreversible nature of transactions. As Bitcoin use cases continue to evolve, users and investors should approach this dynamic landscape with informed caution, acknowledging both its transformative potential and inherent complexities. Investors who are interested in less volatile assets that help to diversify their crypto investments can look to invest in real-world asset security tokens. DigiFT prides itself on being the first regulated exchange for on-chain real-world assets, approved as a Recognised Market Operator with a Capital Markets Services license by the Monetary Authority of Singapore. DigiFT allows asset owners to issue blockchain-based security tokens and investors can trade with continuous liquidity via an Automated Market Maker.